Commercial Real Estate Terminology Pt 2

CAPITALISATION:  The process of estimating the yearly revenue in terms of the amount of capital it would be necessary to invest in order to receive that revenue, calculated at a given rate of interest.  It is a method of arriving at the value of a property by reference to net returns and a expected percentage yield.  Some brokers and investors will use it to assess price for a property.
CAPITALISATION RATE:  This is the interest rate at which an annual income is capitalised.  The rate is a reflection of the prevailing acceptable returns on investment for differing types of investments.  When you compare available returns across a number of investments (eg shares, property, bonds), the investor can choose the best available investment vehicle for their needs of return.  A true investor will invest in not just property, but rather a group of investments that maximises return and lessens risk.

CAVEAT EMPTOR - Let the buyer beware. In real estate, in the absence of specific representation by the vendor or his agent as to the conditions of a property or the uses to which it may be put, the buyer takes the risk and must make his own inquiries.

CIRCA - About; around; an approximation.

COMPARABLES - An abbreviation for sales of comparable properties, i.e. used for comparative purposes in the valuation process.

CONDITIONS OF SALE - The conditions under which the purchaser takes property sold to him. In the case of auction sales, a copy of the conditions may be advertised prior to the day of sale, posted in a conspicuous place in the sale room on the day of sale, printed with the particulars or catalogue of the property to be sold or copies may be distributed amongst the intending bidders. Where real property is the subject of sale the conditions contain (inter alia) provisions as to title to be accepted by the purchaser and how it is to be proved and amount of deposit. When a sale is concluded, the purchaser signs a memorandum endorsed on the conditions, the whole becoming the contract of sale. Conditions of sale are frequently attached to goods specifying (inter alia) what warranties attach or do not attach and, generally, the purchaser will be deemed to have notice of such conditions and the sale will be affected by them accordingly. In South Australia it must be displayed at specific times.

COVENANT - An agreement or promise by deed, by which one party pledges to the other that something has been done or will be done, or stipulates for the truth of certain facts. He who promises is called the covenanter; and he to whom the promise is made is the covenantee. Covenants are either positive or negative, and relate as a rule to the relationship between vendor and purchaser, or landlord and tenant. A positive covenant is one by which the party binds himself to do some act or carry out some work; and a negative covenant is one by which the party is restricted in his rights in relation to the other party, or promises not to do a certain thing. Covenants are also express or implied: express, where they are set out in terms; implied, where the mere relationship of the parties automatically creates the covenant.

DEPRECIATION - A loss from the upper limit of value. An effect caused by deterioration, or obsolescence, or both. Deterioration is evidenced by wear and tear, decay, dry rot, cracks, encrustations, or structural defects. Obsolescence is divisible into two parts, functional and economic. Functional obsolescence may be due to: poor plan, functional inadequacy or over-adequacy due to size, style, age, or otherwise. It is evidenced by conditions within the property. Economic obsolescence is caused by changes external to the property such as neighbourhood infiltrations of inharmonious people or property uses, legislation and the like.
(i)         Accrued: The difference between the cost of replacement new and the present value.
(ii)        Book: The amount reserved upon the books of an owner to provide for the retirement or replacement of an asset, as distinguished fro accrued depreciation.

DEPRECIATION REPLACEMENT COST - Depreciated replacement cost is the theory that the value of an improvement may be ascertained at any time by taking the cost of replacement, of an equivalent improvement, at the relevant data, and by writing down such cost by the amount of depreciation which has accrued in the existing structure. Note: this method can only be used under certain conditions, e.g. the improvements are such they ensure that the property is put to the highest and best use, etc.

DISCOUNTED CASH-FLOW METHOD – This is a means of isolating differences in the timing of cash flows by discounting these cash flows to their present values. The two discounted cash-flow methods are the internal-rate-of-return method and the net-present-value method.

DOG BLOCK - The colloquial term given to the first lot facing a street with several rear boundaries of adjoining lots (facing another street) on its side boundary.

DORMANT PARTNER - A silent partner. A person who does not actually participate but maintains a monetary interest in a business and receives some of its profits, if any.

EX GRATIA PAYMENT - A payment as an act of grace, although there is no legal obligation to make it.

EXPERT - An expert is one who, by reason of education, experience or study, is presumed to have knowledge of (or skill in) a field not possessed by men generally. An estate agent is regarded as an expert in property matters.

FEE SIMPLE - The fullest and highest possible estate one can possess in real estate. Ownership of unlimited duration. Upon the owner’s death real estate will pass to his heirs.

FREEHOLD - The highest form of estate in land, and the nearest the law allows a real property owner to approach complete ownership. A freehold estate is one which is of unlimited duration, that is to say, it cannot be said of an estate of freehold at the time of its creation when it will come to an end. Thus, an estate for life is a freehold estate, as, when it is created, while it is clear that it must come to an end with the death of a life tenant, as the person to enjoy for life is called, no one can say for certain when it will end.

HIGHEST AND BEST USE - The most profitable likely use to which a property can be put. The opinion of such use may be based on the highest and most profitable continuous use to which the property is adapted and needed, or likely to be in demand in the reasonably near future having taken into consideration zoning regulation. However, elements affecting value which depend upon events or a combination of occurrences which, while within the realm of possibility are not fairly shown to be reasonably probable, should be excluded from consideration. Also, if the intended use is dependent on an uncertain act of another person, the intention cannot be considered. That use of land which may reasonably be expected to produce the greatest net return to land over a given period of time. That legal use which will yield to land the highest present value. Sometimes call optimum use. The use of, or program of utilisation of, a site which will produce the maximum net land returns in the future, although such return need not be in dollar amounts e.g. Social welfare buildings, schools etc. The optimum use for a site.

HYPOTHETICAL DEVELOPMENT - Hypothetical development envisages the completion of a proposed development of a vacant site or redevelopment of an improved site in order to ascertain the probable net returns from the property.